👀 Copy Legendary Investors' Portfolios in One ClickCopy For Free

Short EUR/NOK Via 6M Risk Reversal

Published 10/01/2015, 01:32 AM
Updated 05/14/2017, 06:45 AM
EUR/NOK
-
AUD/NZD
-
NOK/SEK
-

FX Quant Strategy provides a quantitative overview of the currency market, including several valuation tools and monitors, focusing on the FX options market.

This week we recommend one FX option trade:

- Bearish 6M EUR/NOK risk reversal

According to our spot monitor, NOK currently stands out as looking significantly undervalued against EUR and SEK. EUR/NOK appears the most stretched with EUR/NOK trading 2.1 standard deviations above our short-term financial model's fair value estimate of 9.2382 (spot ref.: 9.501). Fundamentally, we remain of the view that NOK is cheap and although we acknowledge that there is a risk that Norges Bank in contrast to our forecast could cut interest rates further, we think that market's pricing is already quite negative. We forecast EUR/NOK at 9.40 on 1M and 3M, 9.25 on 6M and 8.80 on 12M. Hence, we think that the combination of a stretched spot signal, positive carry and not least the significant option skew offers an attractive opportunity for medium- and long-term investors to build up short EUR/NOK positions, and we recommend to enter 6M bearish EUR/NOK risk reversal.

Implied volatility in general trades in neutral territory across the FX universe and across maturities, with the only two exceptions being the 12M NOK/SEK and 12M AUD/NZD, which are expensive according to our volatility valuation model. Shorter-dated options are in general borderline cheap up to the 1M tenor - with the Scandi crosses looking cheapest at present - while volatilities at the 3M tenors and beyond generally are more expensive from a valuation point of view.

To Read the Entire Report Please Click on the pdf File Below.

Latest comments

Loading next article…
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.